This article was originally published in the September/October 1997 issue of Home Energy Magazine. Some formatting inconsistencies may be evident in older archive content.

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Home Energy Magazine Online September/October 1997

Will Home Energy Rating Systems Become Market Driven?

By Megan Edmunds

Megan Edmunds is a senior planning and development officer at the Colorado Housing and Finance Authority in Denver, Colorado.

Home energy rating systems have stirred considerable interest in the past decade and more and more states are starting their own HERS programs (see HERS Past and Present, HE May/June '95, p.29). Among the more recent start-up programs is Energy Rated Homes of Colorado (ERHC), which opened its doors in 1995 as part of the federally sponsored six-state HERS pilot project (see Making Energy Mortgages Work HE May/June '95, p.27).

Most HERS programs initially focus resources on marketing and publicity campaigns, but many also invest in developing or adapting computer software and other rating tools as part of their program start-up (see Making HERS a Household Word, HE Sept/Oct '91, p.30). ERHC has followed this approach by engaging in an ambitious marketing effort and developing an improved rating software.

To cover start-up costs, many HERS programs rely on seed funding from government and private sources. ERHC has been receiving the bulk of its funding from the petroleum violation escrow funds--the dedicated energy conservation monies awarded to states in a large consumer class action suit against petroleum producers. While the ERHC continues to receive this and other sources of funding, its mission statement specifies that the program will eventually become market driven.

Becoming market driven implies that ERHC will someday generate sufficient program revenues from fees to become self-sustaining. How far has ERHC come toward this goal? Based on a recent evaluation conducted by the Colorado Housing and Finance Authority (CHFA), which is the quasi-governmental authority that oversees ERHC, it still has a way to go.

One of the problems ERHC has faced is lower-than-expected rating volume. For example, data from 1996 show that approximately 500 ratings had been conducted, whereas the ERHC program proposal submitted to CHFA indicates that 2,000 ratings were to have been completed by that time. More ratings may help bring ERHC closer to becoming market driven but other evidence suggests that this may be a difficult goal to achieve.

To date, few, if any, HERS programs have been able to generate adequate revenues to cover program costs. Program cost data supplied by the National Renewable Energy Laboratory shows that most programs are still dependent on external funding sources. On average, states have been able to generate between 10% and 30% of their annual operating costs from program fees (see Figure 1).

Based on these results, HERS providers spend more than they recover from program fees. While costs are likely to be higher for new programs, even those HERS programs that have been in operation for several years still spend significantly more than they charge for ratings.

To see how the programs compared, we divided annual program costs by the number of ratings completed (see Differences between HERS and HERS). Although HERS providers receive funds to support marketing, education, and other related activities, these activities are designed to ultimately increase the number of energy ratings. We thus considered overall costs and rating volume as key evaluation benchmarks.

With the exception of Colorado--which has a high cost per rating due to its being early in start-up with high software development costs--the average cost per rating was about $680. Consumers have been typically paying between $50 to $250 for a HERS rating.

How Much More Will Consumers Pay?
As part of its evaluation of the ERHC, CHFA conducted a customer service satisfaction survey to find out what consumers thought of the program and determine how much they might be willing to pay for a HERS rating. CHFA mailed survey questionnaires to 230 households that had already received an energy rating by ERHC and 84 customers responded.

In general, most of the 84 respondents were very satisfied with the service they received from raters. Nevertheless, most of them also did not think people would be willing to pay more than $200 for a HERS rating--raters in Colorado currently charge consumers approximately $150, $28 of which is paid to ERHC. In the open-ended responses, one respondent explained that it is unlikely that consumers would pay more for a HERS rating than for a complete home inspection, which costs approximately $300.

Respondents were also asked whether they were interested in energy-efficient mortgage (EEM) products. Most were not interested and simply wanted to use the ratings as a means to saving money on utility bills. Low consumer interest in EEMs is unfortunate news for HERS, since a demand for EEMs would increase demand for home energy ratings.

Figure 1. Six-state comparison of HERS funding sources.

Finding Renewable Funding Sources
If those who are interested in ordering ratings are not willing to pay more than they would for a home inspection, then it is not likely that Colorado's HERS program will generate sufficient revenue to become self-sustaining, even after start-up costs decline. Of course, it may simply be too early to tell. Perhaps as programs continue to help institutionalize home energy ratings as part of real estate transactions, the public will catch on and recognize the value of HERS. In the interim, renewable funding sources may become as important as renewable energy sources.
Sources
Colorado Housing and Finance Authority, Program Evaluation of Energy Rated Homes of Colorado. Memorandum submitted to Board of Directors. September 18, 1996.